Albert Einstein once said, “The hardest thing to understand in the world is the Income Tax”. Why is that, even the smartest brains are unable to comprehend the taxes?
In fact, what is more, surprising is that all our lives are around taxes? We earn, we pay tax; we buy, we pay tax; we invest, we pay tax; moreover we even pay the tax for gifts! The further account is about the principles of levying the tax and comparing the Indian tax system per se.
Going by the books of economics, levying taxes is an art in itself. It is not that one may ask any amount arbitrary or ask to deposit it anywhere. There has to be a structure that clarifies what every element of the financial system is supposed to do. The efficiency of any system lies in its administration. The tax efficiency has the following pillars:
Clear, transparent, and most importantly, unambiguous: This is the key to an efficient system. The simpler the laws are, the more it is simple to comply. If one has a complex system of laws, it would lead to many errors. Errors are penalized in any tax system. Ultimately, the system would end up penalizing someone who was honest in his intentions.
Worldwide, the complexity in-laws have only added to tax terrorism by the officials.
In addition, there would be several loopholes one may find in this complex maze; leaving tax departments and courts bewildered.
It is also important that the tax officials should know their job. The GST bill passed in Budget session of parliament was enforced from July 1 of the same year. The country had a time of less than three months to train its more than 10 lakh officials in the entire country! When the tax regime in place, the payer and the collectors were both clueless.
Lastly, they are supposed to be businessmen, not CAs. A complex law would be unfair to those who cannot afford professional help like the affluent. Those with simple business should have simpler taxes.
The tax laws once under a structure should not frequently change. The income tax rates should stay stable so that market players may plan accordingly. This is called as ‘Menu Cost’ in economics. Say a cuisine at a restaurant is priced at ₹100 today. Tomorrow tax is charged at 2%, it becomes ₹102. Next week it is charged at 5%, now it is ₹105. The other week the government provides a 2% subsidy and it is now ₹98. The restaurant has to incur the cost of reprinting menus every other week! This is where GST should look ahead. Determining things, experiment small at first and then implement big so that it stays for long, and stays predictable
The government has to incur a lot of money on tax collection. They have to pay the salary of officials, maintain the infrastructure, cost of implementing digital reforms and much more. On the other side, the taxpayers have to pay fees to a CA for filing their taxes.
This is one of the biggest reasons why GST collections fell short by as much as 33% of its target.
This cost of levy and collection of tax should reduce. The government would be able to save its money while the taxpayers will be able to shop more or provide respite in prices to their consumers.
The government has learning hidden in one of their biggest personal tax reforms- SARAL, the one-page form for salaried employees.
As organizations grow, they have to pay more tax. However, the amount of tax one can pay is subject to their earnings. Countries should ensure that they provide an ample amount of time to their taxpayers. They should also ensure that there is a provision of payment in installments. Fortunately, here the GST earns full marks.
The Closing Remarks
The discussion has been mostly what conventional economics says on taxation but one might see it is quite relatable even after 2000 years, ranging from Chanakya to Adam Smith. One would find that all these pillars seem to be intertwined with each other. Although putting all these things in place is a tough ask, the government must evaluate its reforms and GST Slabs over these yardsticks time and again. Everything said and heard can point to both: the defeat of the GST reform, or the massive success of the Service Tax. Despite all this, according to Daniel Defoe, only two things are certain- death and the taxes.